What does Virginia Ruling of the Tax Commissioner P.D. 09-17 conclude about Salary related to prior employment does not affect Taxpayer's right to subtraction?

Subject

Retiree's imputed W-2 wages qualified for the low-salary subtraction

Plain-English summary

Virginia allowed a retired government employee to subtract imputed wages from employer-provided life insurance. Coverage above $50,000 created taxable income under federal law, and the plan administrator reported that amount as wages on Form W-2 even though the taxpayer was retired and received pension income separately on Form 1099.

The cited Virginia provision allowed the first $15,000 of salary for a federal or state employee whose total annual salary from all employment did not exceed $15,000. Because federal law treated the retiree as an employee for this income and total W-2 wages were under the threshold, Virginia applied the same treatment for the subtraction.

The fact that the wages related to prior employment did not defeat the claim. The Commissioner construed the threshold using all Form W-2 income for the taxable year and abated the assessment, while cautioning that former employees were not thereby treated as employees for every other purpose.

What this means for you

• Review the federal character and information return for unusual post-retirement income.
• Aggregate all Form W-2 wages when applying the historical $15,000 salary test.
• Pension income reported separately was not the W-2 salary at issue here.
• This narrow ruling did not define former employees as current employees for other laws.

Common questions

Why did a retiree receive a Form W-2?

Federal law treated excess group-term life-insurance coverage as taxable wages.

Did the prior-service connection disqualify the income?

No. Virginia focused on the current year's W-2 reporting and total wage amount.

What happened to the assessment?

It was abated.

Citations and references

• Va. Code § 58.1-322(C)(24).
• IRC §§ 79 and 6052.
• IRS Publication 15-B.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-17

Original ruling text

February 4, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your correspondence concerning an assessment received

by your client, * (the "Taxpayer").

FACTS

The Taxpayer is retired and receives a pension. Because he is still covered by life insurance through his retirement plan, the premiums for coverage in excess of $50,000 is taxable income under Internal Revenue Code ("IRC") § 79. The plan administrator is required by IRC § 6052 to report such income as wages on Form W-2, and F.I.C.A. taxes must be paid on this income in addition to income tax. See IRS Publication 15-B. His pension income is reported separately on Form 1099.

On his Virginia return for 2006 the Taxpayer claimed a subtraction under Code of Virginia § 58.1-322 C 24 for the income reported on his Form W-2. This was the only W-2 received by the taxpayer and the amount is less than $15,000. The subtraction was denied because the salary was related to former employment, not employment for the current year and an assessment issued.

RULING

Code of Virginia § 58.1-322 C 24 allows a subtraction for:

Effective for all taxable years beginning on and after January 1, 2000, the first $15,000 of salary for each federal and state employee whose total annual salary from all employment for the taxable year is $15,000 or less.

The statutory language first grants a subtraction ("the first $15,000 of salary for each federal and state employee"), then imposes a restriction ("whose total annual salary from all employment for the taxable year is $15,000 or less"). If the Taxpayer is a "federal or state employee" then he is granted the subtraction, subject to the limiting condition imposed by the last clause. Because he is treated as an employee by IRC §§ 79 and 6052, and his income is classified as wages for purposes of reporting the income in question, Virginia will similarly treat the Taxpayer as an employee for purposes of this subtraction. Please note that this does not mean that the term "employee" includes former employees for any other purpose.

The fact that the salary is related to prior employment does not affect the Taxpayer's right to the subtraction. The restriction requires us to determine if the Taxpayer's total annual salary is $15,000 or less. If we exclude the W-2 income because it was related to employment in a prior year, then the Taxpayer's total annual salary for the taxable year will be zero, which is less than $15,000 and the restriction would not apply to his subtraction.

The purpose of the restriction is to aggregate all salary and wages for purposes of the $15,000 test, so I construe the test as applying to all income reported on a W-2 for the taxable year, not income related to work performed during the taxable year. Therefore, since the total of all of the Taxpayer's income reported on Form W-2 for the taxable year was less than $15,000, the restriction in the second clause of the subtraction does not bar the Taxpayer from claiming the subtraction.

The assessment will be abated. The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.gov. If you should have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

PD/1-2081173216